Friday, July 22, 2011

Memo to Jeff Immelt: When is an Apple Store NOT an Apple Store? When It's in China...

We kick off the return to non-Berkshire Hathaway topics here at NotMakingThisUp in the simplest way possible: by referring readers to a different blog.

That different blog, which was brought to our attention by John Hempton, the ace proprietor of yet another blog, the Bronte Capital blog (which happens to be one of the best in the world), needs no introduction, no commentary, no elucidation from us..but after you are finished reading it, you might want to just think for a bit about what it means:

And if you are Jeff Immelt, who is prepared to put half the vaunted GE jet engine business into a joint venture with the Chinese--the same crowd that thinks nothing of copying Apple Stores down to the shirts and name tags worn by the staffers--you should really think very very hard for a long time about what it means.

What it means, we think, is you are putting your company's future at risk.

Clearly there are many in China with no respect for intellectual property rights, and clearly GE needs to be careful with whom it chooses to do business.

But aren't you generalizing to the point of absurdity when you refer to the Chinese (a group of over 1 billion people) as "this crowd"? There have been many successful joint ventures between American and Chinese companies in the last several years.

Let's phrase that a different way: the Jeff Immelts of the world have alread made up their minds. We should be thinking long and hard (as a society) about whether people who think like Jeff Immelt should be allowed to run GE--but of course, that's way too radical. . .

GE has been shipping turbine technology over to the Far East for twenty years; I remember in the early 1990's when they took much of their blade casting business to Taiwan, setting those suppliers up with knowledge it took the US based manufacturers decades to develop.

GE has been pushing this since Jack's time & Immelt is just moving the pace along a little faster; why shouldn't he use the same stale playbook? I will shed no tears when they eventually (and inevitably) get hosed.....

Against this, we have the electrical failures and repeated safety issues of the Chinese high speed rail industry. Not sure if any of the issues relate to digested IP from Kawasaki or Bombardier, but the result is illustrative.

It certainly makes one think hard about a company's sustainable, competitive advantage when they are willing to sacrafice their IP for "growth". I guess the devils candy of access to one of the world's biggest markets for growth is too hard to resisit even though it may mean the destruction of your business model 10-20 years out.

I'm not the anonymous who made the previous comment about the "many successful joint ventures in China", but, as an example, Cummins has four JV's in China that produced over $140 mm in royalties, interest, and equity income in 2010.

Still, I generally find myself in the skeptical of IP rights in China camp.